But there are still more lessons to be learned about the direct
effects of the stock bubble on ordinary employees. The savings of thousands of
Enron employees were wiped out by the company's collapse because employees'
401(k) plans were filled up with Enron stock. An obvious question, then, is: Just
what impact did the 1990s financial excesses have on the lives of those millions
of workers whose retirement plans have recently come to hinge on the popular but
controversial savings account known as the 401(k)?

In The Great 401(k) Hoax, former BusinessWeek staffers William
Wolman and Anne Colamosca have written a searing critique that debunks the
notion, aggressively promoted by Wall Street, that 401(k) plans offer an easy
road to riches. Their book warns of the growing risks that Americans face from
overreliance on these loosely regulated plans and points the way to potential
reforms.

"The American public has been hoodwinked by political and corporate forces
into relying on the 401(k) as the primary long-term investment mechanism," the
authors write. The story is one of Wall Street -- aided and abetted by the
Clinton administration, academic cheerleaders, and the Federal Reserve -- selling
the country on the stock market as the best way to save for the future, while
minimizing the downside. "Romancing the baby boomers was at the center of Wall
Street's advertising message in the 1990s and has shown no signs of abating in
the postmillennial decade," Wolman and Colamosca contend.

What was in it for employers? "The 401(k) is dirt-cheap," the authors write.
"It costs the employer 50 percent less than the traditional pension. And to make
it even better, the 401(k) relieves the company of any 'sticky' long-term
obligations to retired workers." In other words, worries about rising pension
liabilities for employees, particularly in older industries such as steel,
prompted many companies to trim their costs by jettisoning the kind of
"defined-benefit plans" that guaranteed retirees regular monthly checks. Instead,
corporations shifted increasingly to "defined-contribution plans," and especially
the tax-advantaged 401(k), where management has been able to call many of the
shots and employees have often been given narrow choices. From 1980 to 1996, the
number of people covered by the older plans grew by only three million (to a
total of 41 million), while in the same period the number of Americans with
401(k) plans went to 50 million from 20 million.

But the 401(k) comes with risks: Enron wasn't the only company whose plans
were heavily concentrated in company stock. Such firms as Procter and Gamble,
Sherwin-Williams, and Abbott Laboratories have recently made matching
contributions consisting of 90 percent stock. And there are other disturbing
trends: Last year, facing a recession and new financial uncertainties after
September 11, several big companies -- including Bethlehem Steel, Enron, and
Lucent -- announced they were cutting back on providing the matching funds that
have made the 401(k) attractive to workers.

Clearly 401(k) plans have taken real hits in the last few years, as the market
has slid from its peak. The value of the average 401(k) was $55,000 in 1999 but
had declined to $49,000 in 2000. Wolman and Colamosca see scant prospect that the
next two decades will deliver the kinds of healthy returns of 7 percent annually
that Wall Street likes to promise. Based on their reading of other periods that
have followed stock booms, the authors forecast that average stock returns in the
next two decades, adjusted for inflation, will be closer to 1.9 percent -- the
level that has prevailed for more than a quarter century.

That assessment is bolstered by the authors' telling comparisons between the
1990s and the 1920s: Both periods suffered from what they describe as an "excess
of 'techno-optimism.'" There's no denying that both decades witnessed stunning
advances in technology that contributed mightily to economic growth and the
market's performance; but the market's rise was also spurred by some degree of
hype, fed by what Yale economist Robert J. Shiller calls "amplification
mechanisms," which the authors say "turn a good story into a story that is too
good to be true."

So the reliance on 401(k) plans as they're presently structured
and regulated seems like a pretty risky bet. And compounding the problem is that
the United States has long lagged behind Germany, Great Britain, Canada, and
others in offering decent public-pension benefits. In Germany, for instance,
retirees usually receive between 75 percent and 85 percent of their salaries
through that country's equivalent of Social Security.

Wolman and Colamosca, in offering advice to individuals, recommend
that people put more money into bonds -- and particularly inflation-indexed bonds
issued by the U.S. Treasury -- as a central strategy for the slow-growth market
they foresee. The key to investment success, the authors say, "is to drown out
the noise that comes from the Street on the cable financial channels, in the
personal investment magazines, and, above all, from the investment houses
themselves."

But they also acknowledge that employees are often limited in their investment
choices by their company's 401(k) plans, which too often are shaped by
"managerial arrogance" and attempts "to copy the investment strategies followed
by the wealthy." The book thus calls for Washington policy makers to overhaul
protections for 401(k) plans to ensure that workers don't get short shrift.
Spurred by concern about the instability and fragility of the American pension
system, the writers conclude that "an FDR-style New Deal for the nation's pension
system" could go a long way toward remedying the problems with private pensions.

The authors propose several sensible, though politically difficult, ideas for
reformers to push. For starters, there's a need for employees to have
unrestricted choices of investment options in their plans. Wolman and Colamosca
emphasize that those choices should apply to both a worker's own investments and
to the employer's matching contribution. They also suggest that laws need to be
changed to eliminate conflicts of interest that can arise between employees and
employers when a company chooses an investment house to administer plans.
Further, the kinds of restrictions that limited Enron employees from selling
their stocks need to be eliminated.

Perhaps the most difficult change, but also the most crucial one, is to ensure
that companies' matching contributions not be made in stock but in cash, to
enhance employee control over investments. Unfortunately, the ability to make
contributions in stock is one of the driving forces behind the growth of 401(k)
plans, because it looks better on companies' bottom line. The only plausible way
that companies might be weaned from using stock would be if Congress passed new
tax incentives to induce firms to make their matches in cash.

As a more modest alternative, Wolman and Colamosca suggest limiting the amount
of company stock to 10 percent in any one plan. That proposal seems on target,
but one recent Senate measure that would have capped company stock at 20 percent
provoked furious business opposition and has been dropped by Democratic Senators
Jon Corzine of New Jersey and Barbara Boxer of California.

In the end, the authors note that 50 percent of American workers don't have
any private pensions to supplement their Social Security benefits. They wonder
whether it's time to find the political will to increase Social Security "for the
millions of Americans who will soon be retiring with little savings at all." That
question, like many this book raises, needs to be put on Washington's agenda.